Jan
29
Home Ownership in Record Plunge
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Fourth quarter saw biggest one-year drop in since tracking began in 1965 – as mortgage problems and rising foreclosures take their toll.
NEW YORK (CNNMoney.com) — The housing and mortgage meltdown caused the biggest one-year drop in the rate of homeownership on record, according to government figures released Tuesday.
The Census Bureau report showed that home owners accounted for 67.8% of occupied homes in the fourth quarter, down 1.1 points from a year earlier. It’s the largest year-over-year drop recorded in the report. The ownership rate was also well below the 68.2% ownership rate in the third quarter of 2007.
Homeownership rates, which have been tracked since 1965, hit a record high of 69.2% at the end of 2004.
The report also also showed a record 2.18 million homes vacant and available for sale in the fourth quarter, up from the 2.07 million in the third quarter and the 2.1 million a year earlier. The fourth-quarter reading on vacant homes for sale matched the previous record set in the first three months of 2007.
The report comes the same day that RealtyTrac, an online seller of foreclosure properties, reported that total foreclosure filings grew 75% in 2007 and S&P Case/Shiller, which tracks home values in the nation’s largest markets, posted the biggest price decline on record its November reading.
The glut of vacant homes is a sign the evaporation of demand for home sales, which has hammered housing values. It also signals bad news for homebuilders, who were stuck with a record inventory of 195,000 completed homes at the end of December. A separate Census Bureau report Monday showed the biggest drop in new home sales on record in 2007.
Lennar (LEN, Fortune 500), the nation’s largest builder by revenue, reported a company record $1.25 billion fourth-quarter loss on Thursday, as it was hit by both lower sales price, weak sales volume and hefty charges to write down land values. It had previously agreed to sell 11,000 properties to the real estate arm of Morgan Stanley (MS, Fortune 500) for only 40 percent of their previously estimated value.
Other top builders, including KB Home (KBH, Fortune 500) Centex (CTX, Fortune 500), D.R. Horton (DHI, Fortune 500) Pulte Homes (PHM, Fortune 500) and Hovnanian Enterprises (HOV, Fortune 500), are all expected to post losses through much of 2008.
Jan
29
Home Price Drop is Biggest Ever
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The S&P Case/Shiller report shows the biggest year-over-year price decline on record.
NEW YORK (CNNMoney.com) — The housing market is only getting worse, according to the latest report from S&P Case/Shiller released Tuesday.
Home prices were down 8.4 percent in November compared with last year in its 10-city index, a record low. The 20-city index also fell 7.7 percent.
The Case/Shiller report compares same-home sale prices. The industry considers it to be one of the most accurate snapshots of housing prices.
Previously, the largest year-over-year decline on record was 6.3 percent in April 1991. The November report marked the 11th consecutive month of negative returns for the index, and twenty-four months of decelerating returns.
Cities in trouble
“We reached another grim milestone in the housing market in November,” said Robert Shiller, Chief Economist at MacroMarkets LLC and co-creator the index in a statement.
“Not only did the 10-city composite index post another record low in its annual growth rate, but 13 of the 20 metro areas, each with data back to 1991, did the same.”
The worst hit market of the 20 metro areas covered was Miami, where the median home fell a whopping 15.1 percent in value. San Diego prices also fell steeply, down 13.4 percent. Las Vegas was off 13.2 percent and Detroit by 13 percent.
Three cities did emerge with higher prices compared with 12 months ago: Prices rose 2.9 percent in Charlotte, N.C., 1.8 percent in Seattle and 1.3 percent in Portland, Ore. But even these markets have turned down over the last three months. Indeed, every city in the index recorded at least three consecutive months of falling prices through November.
The three biggest U.S. cities also recorded year-over-year declines; New York was down 4.8 percent, Los Angeles 11.9 percent and Chicago 3.9 percent. The losses in Los Angeles accelerated in November; that city recorded the largest month-over-month drop of any index city, 3.6 percent.
Tuesday’s report came in the wake of many other surveys indicating that the housing market is getting worse. Foreclosure filings and the risks of future foreclosures were both up sharply; the number of new homes sold plunged more steeply than any year on record; and the pace of existing home sales fell to their lowest level in 27 years.
Jan
29
Defaults are on the rise according to a new report, and the trend could last for years.
NEW YORK (CNNMoney.com) — The risk of foreclosure is on a rapid rise nationally, and could last for years.
A report released Monday by First American Core Logic rates foreclosure risk for 381 metropolitan areas, and found that the risk of foreclosure has jumped 22 percent from January 2007, and 9 percent from three months ago.
The risk scores are calculated based on economic factors such as job growth or loss, as well as incidences of fraud and other risks. Home price trends are especially important.
“Before, it was all about the economy. Now, price drops are overcoming economic conditions [in driving up foreclosures],” said Mark Fleming, Core Logic’s chief economist.
The Core Logic report speculated that foreclosure risks may get a lot worse, and stay that way for a long time.
In the wake of recent speculation that the United States economy may be entering a recession – or is already in one – the report stressed that defaults continued rising for almost 2 years after the end of the last recession in 2001.
Based on that history, Core Logic expects that foreclosure risk will continue to increase over the next 18 months, at least.
Down in the valley
The price declines are hitting hardest in California, especially the Central Valley cities that had recorded outsized price gains during the boom. Of the 36 markets nationwide undergoing double-digit price declines, 22 are in California. And five off the top 10 large cities facing the highest risk of foreclosure over the next six months are also in California.
Bakersfield, Calif., was rated the highest risk market among the 100 largest metro areas. Home prices there are in steep decline, falling 16.9 percent during the past year, according to First American’s Loan Performance division. Fleming pointed out that Bakersfield is a good example of a trend that is playing out in many markets.
Bakersfield acts like a satellite city for Los Angeles, where population density makes further housing development expensive. Supply of developable land in Los Angeles is scarce, which props up its prices, even in down years.
During the boom, home buyers priced out of L.A. purchased in far-flung markets like Bakersfield, where plentiful agricultural land was cheaply converted to housing. Many of the new residents continued to work in the Los Angeles area, a long but doable commute.
When demand slackened and prices slumped in Los Angeles, more people could afford to buy closer to the city, and demand dropped disproportionately in Bakersfield as well as in other nearby cities like Riverside and San Bernardino, sending prices plunging.
“Volatility in these places is high, especially on the down side,” said Fleming.
And that goes a long way in explaining why foreclosures are on the rise in Bakersfield, Stockton, Calif. (number 2 on the Core Logic list), Fresno, Calif. (number 3) and Riverside-San Bernardino (number 6).
Monday, the government reported the steepest drop in new single-family home sales ever recorded. It was the first year on record that new home prices posted declines. That followed last week’s announcement from the National Association of Realtors that home prices had recorded their first annual decline ever.
After price drops, many mortgage borrowers find themselves owing more on their mortgages than their homes are worth. It then becomes more difficult for them to maintain their house payments if they run into any problems, because they can’t borrow against their home.
Jan
23
According to a Merrill Lynch report, home prices will drop 15 percent this year, and declines will continue in 2009.
NEW YORK (CNNMoney.com) — The worst housing financial crisis in decades is only going to get worse, a Merrill Lynch report said Wednesday.
The investment bank forecasted a 15 percent drop in housing prices in 2008 and a further 10 percent drop in 2009, with even more depreciation likely in 2010.
By contrast, the National Association of Realtors (NAR) expects housing prices to remain flat in 2008. NAR did cut its home price estimate for the current quarter, however, to a 5.3 percent year-over-year decline, which represents the steepest drop in that price measure on record. But NAR sees an uptick in home prices in the last two quarters of 2008.
“Merrill Lynch’s figures are way too pessimistic, and they are unprecedented,” Lawrence Yun, the National Association of Realtors chief economist told CNNMoney.com. “There is so much variation in local housing markets, and we see stable price conditions for 2008.”
The current housing crisis and the depreciation in home prices have pummeled the economy, with businesses and consumers cutting back on spending, raising the specter of a recession. “Lower sales and higher inventory for sales are lowering the velocity of transactions,” said Fritz Siebel, Director of US Property Derivatives for Tradition Financial Services. “That cannot be a sign of good health for the economy.”
But for those who think that the worst is over, Merrill Lynch said that housing prices still remain comparatively high. The brokerage believes that home prices are still far above historical norms when compared to other measures such as rent or GDP. “By our calculations, it will take about a 20 to 30 percent decline in home prices to correct this imbalance,” said the report.
Merrill Lynch believes that housing starts will most likely slide another 30 percent by the end of 2008 – a historic low.
The report says that the inventory situation only continues to worsen, as homebuilders are now looking at more than a nine months’ supply. “The current supply/demand environment does not favor a swift recovery in the housing market, in our view,” according to the report.
Yun agrees that the reduction in housing starts will not bode well for the economy, especially in the homebuilding industry, but he believes that the reduction will soothe the housing market by slowing the glut in inventory. “The reduction in housing starts is not stabilizing the economy, but it will stabilize the market,” said Yun.
Jan
23
Recession 2008: How Bad Can It Get?
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Many economists are predicting a short, shallow recession. But there’s also a significant risk of a more serious economic decline.
NEW YORK (CNNMoney.com) — The sputtering U.S. economy has gotten everyone from the financial markets to the Federal Reserve to Congress in a panic.
But here’s a disheartening message for those already worried about economic growth — it could get much worse.
Most economists who believe a recession is already here or at least near are looking for a relatively short and mild downturn, perhaps lasting only two or three quarters.
But many of those same economists say they also can envision a worse-case scenario where spending by consumers and businesses falls off sharply, unemployment heads higher than normal during a typical recession and housing and credit market problems worsen.
“I can easily imagine [the economy] going into a free fall,” said Dean Baker, the chief economist for the Center for Economic and Policy Research. “The danger is that housing prices continue to tumble and accelerate, people’s ability to pull out equity will evaporate, and you’ll see a serious downturn in consumption.”
We talked to three more leading economists to find out their biggest economic fears. Here’s what they had to say.
Greenback blues David Wyss, chief economist with Standard & Poor’s, said that among his biggest concerns is that overseas investors could pull back on investing in the dollar and other U.S. assets.
That could cause an even greater sense of fear among U.S. consumers and businesses, as stock prices fall and bond yields rise, which in turn would lift mortgage rates and be a bigger drag on the already battered housing market.
“Americans could just get scared by a barrage of bad news,” Wyss said. “The stock market could continue going down because of foreigners pulling money out, and between that and home values going through the floor, it could lead to a real pullback of spending, particularly by Baby Boomers who are getting close to retirement.”
Wyss said he’s also concerned that oil prices could shoot higher, even if a recession cuts into global demand. He said supply disruptions in the Middle East could send oil prices up to $150 a barrel and help deepen any recession.
Wyss said that in his worst case scenario, the unemployment rate would climb to 7.5 percent by early 2009, up from its current level of 5 percent.
He also believes gross domestic product, the broad measure of the nation’s economic activity, could wind up as much as 2 percent lower at the end of 2008 than it was at the end of 2007. That would be the biggest downturn since 1982. Many of those forecasting a recession this year are expecting GDP to show a slight gain by the end of the year.
House of pain. Edward McKelvey, senior economist at Goldman Sachs, agreed with Wyss that, in a worst case scenario, GDP could fall 2 percent this year..
His biggest fear is that home prices could fall much further in the coming months. In fact, Goldman and economists at Merrill Lynch have both predicted that home values could fall another 15 percent, on top of the 10 percent drop from earlier peaks that has already taken place.
McKelvey said further declines could cause much deeper problems for consumers and credit markets.
“One of the most likely candidates would be credit markets acting more violently than we thought, a tightening of the supply of credit to businesses and households,” he said when asked what could bring about his worst case outlook.
“You could also see a more substantial response by businesses to the downturn through layoffs, cuts in their spending and business plans,” he added.
Bank woes just beginning. Paul Kasriel, chief economist at Northern Trust, said he thinks there’s a good chance that the economic pullback will be much steeper than now widely assumed. This weak forecast is based on his belief that the billions in dollars of writedowns already reported by Merrill Lynch (MER, Fortune 500), Citigroup (C, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and other big banks are just the beginning of the problem in the financial sector.
Kasriel said that if banks have to report more losses due to bad bets on subprime mortgages, they will be unwilling, or unable, to make large loans to businesses and consumers.
So even if the Fed keeps cutting interest rates, the impact of the cuts may be “less potent” than rate cuts in previous recessions since consumers and businesses may not be able to borrow enough to keep spending. That could make this recession more like the one in 1991-92 than the relatively short and mild recession of 2001.
“Historically, and not surprisingly, recessions accompanied by declines in consumer spending tend to be more severe. And people are going to be constrained from spending by the declines in housing,” Kasriel said.
He added that state and local governments might have to cut back spending as a result of declining tax revenue. And that would be another sizable blow to the overall economy.
“People forget about state and local government spending, but it represents 11 percent of GDP,” Kasriel said. To top of page
Jan
23
Stunning Jump in Foreclosures
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Stunning numbers related to foreclosures in California!
(01-22) SAN FRANCISCO — Foreclosures and default notices skyrocketed to record peaks in California and the Bay Area in the fourth quarter of 2007, according to a report released Tuesday. The information was a fresh reminder that the slumping real estate market is continuing to have a serious impact on homeowners, particularly those with risky subprime mortgages.
Lenders repossessed 31,676 residences in California in the October-November-December period, according to DataQuick Information Systems, a La Jolla research firm. That was a dramatic 421.2 percent increase from 6,078 in the year-ago quarter.
In the Bay Area, foreclosures rose an equally stunning 482.5 percent to 4,573 in the fourth quarter, compared with 785 a year ago. Contra Costa County, with 1,558 foreclosures, up 533.3 percent from a year ago, had the most, followed by Alameda County with 1,026 (a 514.4 percent increase) and Solano County with 704 (up 528.6 percent).
“Foreclosure activity is closely tied to a decline in home values,” DataQuick President Marshall Prentice said in a statement. “With today’s depreciation, an increasing number of homeowners find themselves owing more on a property than its market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move.”
It was the most foreclosures since DataQuick began tracking them in 1988 and more than double the previous peak of 15,418 foreclosures in the third quarter of 1996. The fewest foreclosures recorded were in the second quarter of 2005, when 637 homes were repossessed.
Mortgage default notices, sent by lenders when homeowners are several months behind on payments, also hit record highs. Default notices are the first step of the foreclosure process.
Statewide, lenders sent 81,550 default notices, up 114.6 percent from 37,994 in the fourth quarter of 2006. It was up 12.4 percent from 72,571 in the third quarter of 2007. It was the most defaults since DataQuick began tracking them in 1992.
In the Bay Area, default notices were up 136.9 percent from a year ago, with 12,704 households receiving them. Year-to-year increases in default notices ranges from 84.4 percent in San Mateo County to 199.7 percent in Sonoma County. Contra Costa had the most notices by number, with 3,805, followed by Alameda with 2,573 and Santa Clara with 2,162.
Another gloomy statistic showed that default notices are increasingly more likely to turn into foreclosures. Homeowners can resolve defaults by catching up on their payments, refinancing or selling the house for what they owe. Only 41 percent of homeowners in default were able to pursue these solutions, DataQuick said, compared to 71 percent a year ago.
DataQuick said most of the loans that went into default in the quarter were originated beween August 2005 and August 2006, during the height of subprime loan frenzy.
The median home price in California at year end was $402,000, down from $484,000 in March, DataQuick said. However, it pointed out that much of that decline is due to a change in the types of houses sold, as fewer high-end properties changed hands after mortgage lending tightened in August.
On a loan-by-loan basis, mortgages were most likely to go into default in Merced, San Joaquin and Stanislaus counties, DataQuick said. They were least likely to go into default in San Francisco, Marin and San Mateo counties.
Jan
22
Interesting twist but not unexpected!
Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.
CARLSBAD, Calif. — Marty Ummel believes she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.
What makes Ummel different is that she is suing her agent, saying it was all his fault.
Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.
Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.
“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?’ ”
Agents representing buyers rarely had the opportunity to make mistakes during the last real estate boom, in the late 1980s, because the job hardly existed then. For decades, residential transactions almost always involved brokers who, whatever assistance they gave the buyer, legally represented only the seller. The long boom that began in the late 1990s put an end to that one-sided world. As prices spiked, buyer’s agents and brokers became popular as sounding boards, advisers and negotiators. The National Association of Realtors estimates they are now involved in two-thirds of all residential purchases.
That makes this the first housing collapse in which large numbers of buyers had a real estate professional explicitly looking after their interests. The Ummel case poses the question: In a relationship built on trust, where promises are rarely written down and where — as in this case — there is no signed contract, what are the exact obligations of these representatives in guiding their clients through a sizzling market?
“Agents have a lot of fiduciary duties, but they don’t make money unless they close the sale,” said Joel Ruben, a real estate lawyer in Manhattan Beach, Calif. “In an inflated market, there are built-in temptations to cut corners.”
The defendant in the Ummel case is Mike Little, a veteran agent with ReMax Associates. He will argue that Marty Ummel, who brought the case with her husband, Vernon, is trying to shift the blame for the couple’s own failures of research and due diligence.
“They simply didn’t do what is expected of a knowledgeable, sophisticated buyer, and are now looking for someone other than themselves to take responsibility,” Roger Holtsclaw, an agent who was hired by Little as an expert witness, said in a court deposition.
Horner, the lawyer, said valuation is a tricky area for brokers.
“Brokers aren’t appraisers,” said Horner, one of the writers of a guide to suing brokers. “They have no obligation to opine about value. But once they do, it becomes a gray area whether it’s puffery or a misstatement of a known fact.”
Most people who made a bad real estate deal might wince and move on, but people who know Marty Ummel describe her as unusually determined. She spent a year picketing ReMax offices on weekends.
Vernon Ummel, an administrator at Dominican University, gave her his permission to pursue the case, on one condition: “Don’t tell me how much the legal fees are.” So far, the bills come to $75,000, more than Marty Ummel’s annual salary as a fundraiser at California State University-San Marcos.
“I do not think I’m obsessive-compulsive, but I am 114 pounds of absolute perseverance,” Marty Ummel said.
Jan
18
The trend continues…
Steeper than expected plunge in December ends year that saw homebuilding, permits post declines not seen since past recessions.
NEW YORK (CNNMoney.com) — Housing starts and building permits plunged in December much more than expected, resulting in a full-year decline in new home construction that was the sharpest drop in 27 years.
And there is little sign things will get better soon. According to government data released Thursday, the full-year total for building permits posted the biggest drop in 33 years. The sharp dropoff in building is one of the reasons that many leading economists are growing increasingly fearful that an economic recession is near, if it hasn’t already struck.
The pace of housing starts in December dropped 14 percent to a seasonally-adjusted annual rate of 1.01 million in December, according to the Census Bureau report.
That figure is down from the 1.17 million November reading, which was also revised lower. Economists surveyed by Briefing.com had forecast the annual pace of starts would fall to 1.15 million in the latest reading.
The level of starts in the month was the weakest since May 1991, when the country was just coming out of the 1990-91 recession.
“These figures confirm that the housing recession continues to deepen,” said Mike Larson, a real estate analyst for Weiss Research. “Slumping consumer confidence and tighter lending standards have already taken their toll on demand, and the broader economic slowdown we’re starting to see unfold now threatens to make a bad situation worse.”
For the year, housing starts fell 25 percent to 1.35 million. That decline represents the biggest drop since the recession year of 1980 and the third largest drop since the Census Bureau started tracking this activity in 1959.
Building permits, which are often taken as a measure of builders’ confidence in the market, fell 8 percent to an annual rate of 1.07 million from 1.16 million in November. Economists had forecast permits would fall to 1.14 million in the latest reading.
Permits were at the lowest level since March 1993 in the month. For the year permits plunged 25 percent, which was the biggest drop in that measure since the 1974 recession year. It was also the second largest decline on record.
Builders are slamming the brakes on production, because the glut of completed new homes on the market is eating into housing prices and company earnings. A separate Census Bureau reading reported a record 193,000 completed new homes on the market for sale at the end of November, and that builders were typically facing a 6.2 month wait to sell homes after they are completed.
“The only potentially good news [in the report] is the continued decline will help to alleviate bulging inventories,” said Adam York, an economic analyst with Wachovia.
The report also comes the day after a survey by the National Association of Home Builders found that confidence in the sector only slightly above record lows, with three out of four builders saying the level of buyer traffic was either low or very low, more than two-thirds saying the current market conditions were poor, and just over half expecting the market to still be poor in six months.
That weakness has also hammered at the results of the nation’s largest builders. A week ago KB Home (KBH, Fortune 500), the nation’s No. 5 builder by revenue, reported a fiscal fourth quarter loss that was nearly 10 times worse than forecasts, as CEO Jeff Mezger told investors during a conference call that “As we enter 2008, we see no indication markets are stabilizing.”
Lennar (LEN, Fortune 500), the nation’s No. 1 home builder, is forecast to report a large increase in fiscal fourth quarter losses when it releases results Jan. 24. Those losses are forecast to continue throughout this fiscal year as well. Analysts are looking for No. 6 builder Hovnanian Enterprises (HOV, Fortune 500) to post losses in both fiscal 2008 and 2009.
Analysts are also forecasting that No. 2 Centex (CTX, Fortune 500), No. 3 D.R. Horton (DHI, Fortune 500) and No. 4 Pulte Homes (PHM, Fortune 500) are going to report continuing losses until at least their final quarters of this calendar year.
The builder with the forecast of the quickest return to profits is luxury home builder Toll Brothers (TOL, Fortune 500), seen as posting a narrow gain in the quarter ending in July. It posted its first loss as a public company in its most recent period, which ended in October.
Jan
17
Wealthy May Be Next in Line in U.S. Home Crisis
(Reuters) – A house in this wealthy Chicago suburb is far beyond the reach of most Americans.
A house in this wealthy Chicago suburb is far beyond the reach of most Americans.
Unfortunately, Hinsdale may also now be too expensive for some of the people who already live here.
“There is a section of the population here that over-extended themselves to buy here and then keep up the facade of wealth,” said Sharon Sodikoff, a broker associate at local real estate agency Prudential Homelife Realty. “In the next year or so they’ll be forced out in dribs and drabs.”
With a picturesque little downtown area and large, expensive houses — according to the Headrick-Wagner Consulting Group, the average home sale price here in the 12 months to September 30, 2007, was around $1.15 million — Hinsdale seems a world away from the housing slowdown that may have brought the U.S. economy to the brink of a recession.
But even here, far from the housing crisis’ epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they’d be able to sell, but now they are stuck.
“The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it,” said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A “prime” borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.
“For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost,” said Chicago-based real estate agent Marki Lemons.
There are also signs some lenders are warily eyeing “prime” borrowers. Tom Kelly, spokesman for Chase Home Lending, a unit of JPMorgan Chase & Co, said the company raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in the second and third quarters last year.
“The concern is people who have borrowed a large percentage of the equity (in their homes),” Kelly said. “Now the value of their homes is falling and they can’t refinance.”
“Some just stop paying and walk away,” he added.
SHORT SALE
Getting into property during the boom was easy, with mortgages freely available for no money down.
Then came the subprime crisis and the credit crunch, slowing the market, pushing prices down and home inventories up. In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than 6 months in January 2006.
While it’s apparently a buyers’ market, Lawrence Yun, chief economist at trade group the National Association of REALTORS, says high-end borrowers are put off by the high interest rates now applied to so-called “jumbo” mortgages, those for $417,000 or more.
“Potential buyers say ‘no way am I buying at that price,”‘ Yun said. “If people can’t enter the market, this slows everything down and puts pressure on foreclosures.”
If some borrowers can’t get into the market, there are others who can’t sell to get out. Home owners who bought recently with no money down are the ones most likely to abandon a property when they fall behind on the mortgage.
“I’ve seen people who bought less than a year ago and have no equity in their homes simply walking away with no regard for the consequences,” said Genie Birch, a real estate agent at Chicago-based Koenig & Strey GMAC who covers the city’s wealthier districts.
Real estate agents say speculative investors who bought to make a profit are also walking away as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.
The home owners who find it harder to walk away are those who took out large home equity loans before prices started falling and now owe far more than their home is worth.
“It’s difficult for home owners in that situation to sell as they’ll still be left owing money,” said Dave Hanna, managing partner of Prudential Preferred CRE, which owns Prudential Homelife Realty in Hindsale.
Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure. The alternative solution available to them is to opt for a short sale.
Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower’s credit rating is damaged, but not as badly as if they had lost the home.
“You won’t see many foreclosed homes here because that would involve public embarrassment,” Prudential Homelife Realty’s Sodikoff said. “But they will call their realtor and get them to quietly broker a deal to get out of their homes.”
Jan
4
The New Math Of Credit Scores
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This is a great development…
The company that cooks up credit scores for millions of Americans is changing its recipe — and that could affect how easily you get credit in the future.
Fair Isaac Corp., maker of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan. For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts its new system will help lenders reduce default rates on their consumer credit by between 5% and 15%.
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The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.
The FICO score, which Fair Isaac says is used by 90% of the 100 largest banks, and other similar scores hold sway over the lives of millions of people. Financial institutions use them to determine the granting and pricing of credit, insurance, cellphone usage and, in some cases, employment and utility services. Some consumer groups have raised concerns about whether credit scores are being used properly and whether they are valid measures of credit risk for some groups of consumers, especially minorities and lower-income individuals, says Travis Plunkett, the legislative director for the Consumer Federation of America.
Credit scores, which are calculated using proprietary models, also are criticized for a lack of transparency. “This is a product, per se, but it’s a product that has inordinate influence on the financial lives of hundreds of millions of Americans,” says Mr. Plunkett. Fair Isaac, based in Minneapolis, says it believes it does a good job of explaining the factors that go into calculating the FICO score and in guiding consumers on how to manage their scores.
Consumers could start seeing the new FICO scores by the spring, though some lenders may take additional time to test the system to see how it works with their business and loan portfolios. Fair Isaac, which last revamped its scoring model earlier this decade, says it is accelerating its FICO 08 rollout, partly in response to lenders’ demand for better risk-management tools.
The latest version of the FICO score will largely look and feel the same to consumers and lenders. Scores will still range from 300 to 850 — the higher the better — and the model will continue to look at the same factors, including consumers’ level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores.
But the new model will more finely slice and dice the information in consumers’ credit files to do a better job of separating the “good risks” from the “bad risks,” particularly for subprime borrowers; those with “thin,” or young, credit files; or consumers who are actively seeking new credit. “Those are the communities that lenders are most interested in” to determine credit risk, says Craig Watts, spokesman for Fair Isaac.
“Consumers who are low risk will score better with the new FICO version, and consumers who are high risk will score lower,” says John Ulzheimer, president of consumer education for Credit.com, a personal-finance Web site. Higher-risk borrowers may find it tougher to get credit, while those with less-risky profiles — though they may have gotten approved for credit accounts in the past — will start to get better deals from lenders, he says.
Two people with the same FICO score currently could see their scores diverge under the new system. One possible reason: FICO 08 gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan, because it shows they can manage payments on different kinds of loans. On the other hand, the new scoring system penalizes to a greater degree borrowers who use a high percentage of their available credit.
FICO 08 also will draw greater distinctions among different borrowers who are at least 90 days late in making a loan payment, known as a serious delinquency. Traditionally, many credit-scoring models grouped subprime consumers into one general category. But Fair Isaac says its new model will give a higher score to a borrower in arrears if they also have a number of other credit accounts in good standing. Conversely, a person’s score could drop if he or she has multiple delinquent accounts.
“Overall, more consumers will see their FICO scores go up slightly than will see their scores drop,” says Tom Quinn, vice president of global scoring solutions for Fair Isaac.
Despite the new scoring model, consumers still have to make sure the information in their credit reports, which Fair Isaac relies on to come up with its score, is accurate. If consumers feel their FICO score is unfair, they would have to go to the individual credit bureaus, Experian Group Ltd., TransUnion LLC and Equifax Inc., for a copy of their credit report on file and look for any errors or missing information. If there are any, they would have to contact the credit bureau or the financial institutions to dispute those errors.
FICO 08 also aims to curtail the growing business of allowing people to polish their credit by “piggybacking” on someone else’s good credit history. In recent years, credit-repair Web sites have sprung up that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. When scoring a consumer, FICO 08 won’t take into consideration credit-card accounts for which that person is an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score.
FICO 08 is likely to face some competition from VantageScore Solutions LLC of Stamford, Conn., a joint venture of the three credit bureaus that was rolled out in 2006. Fair Isaac has sued VantageScore and the three bureaus, accusing them of using unfair and anticompetitive practices to harm the FICO brand. Recently, Equifax linked the suit with the launch of FICO 08. The company has said it wouldn’t move forward with FICO 08 and that its relationship with Fair Isaac remains “strained” until the lawsuit is resolved, says David Rubinger, Equifax spokesman. The new FICO model has already been distributed to Experian, which is in the process of implementing it, while TransUnion expects to have the scoring model available for lenders to test during the second quarter of 2008. Fair Isaac says its intention is to provide the formula to all three credit-reporting agencies.